Conforming Loan

Most lenders would prefer that all home loans be conforming, so they can sell them on the secondary market. There are two types of conventional home mortgages: conforming and non-conforming. If you ever received a notice that your mortgage loan was sold to another company, you’ll know that home loans are repackaged and sold. The biggest buyers of these loans are government sponsored entities called Fannie Mae (short for Federal National Mortgage Association) and Freddie Mac (a.k.a. Federal Home Loan Mortgage Corporation). They then pool these mortgages together and sell them as mortgage-backed securities to investors on the open market.

The government sponsored these companies to free up capital for local banks, so they could make more home loans. When a loan meets the standards of Fannie Mae and Freddie Mac, they are said to be conforming. A jumbo loan (usually at least $453,000, but varies by region) is considered to be non-conforming.

The main advantage to a borrower for a conforming loan is that they usually offer lower interest rates, particularly for those with excellent credit. Since jumbo loans are riskier and can’t be sold on the secondary market, they generally involve a higher interest rate. But if you live in San Francisco and need a jumbo loan, you might have to make a down payment of at least 20% or higher, pay higher closing fees, and have 6-12 months of mortgage payments in a bank or other account for extra security for the lender.